In the past, when all options trades were transacted on the floor, order processing and quote processing were completely separate manual processes. Individual quotes were manually maintained in an automated system which displayed one quotation for the entire pit, representing the best price but without an associated size. Orders, on the other hand, were maintained on one or more separate order books. A best bid and offer was calculated for quotations and professional orders, while a separate best bid and offer was calculated for the limit order book.
With the widespread adoption of multiple listings, exchanges began to increasingly integrate their systems and to execute orders and quotes completely electronically. As a result, some market centers now consolidate all active nonmarketable orders and nonmarketable quotes and maintain them together in the same book memory. For electronic systems that algorithmically allocate trades among orders and quotes, there are advantages to storing both in the same book.
In addition to storing orders and quotes in the same book, some systems also allow orders and quotes to be submitted to a market center using the same data pipeline, requiring a “thicker” telecom link to handle both, as an order message generally requires more data elements than a quote message does. While the ability to use one pipeline for both orders and quotes has some operational advantages, and having both orders and quotes already integrated on a single book makes it easier to execute and allocate trades, such business strategies may be less than optimal from a performance standpoint due to the high volume of options quotations compared to the much lower volume of options orders.
The options marketplace has historically been a quote-driven market, in contrast to the equities marketplace, which is generally perceived to be more of an order-driven market. On the options marketplace, a single stock can be the underlying for a hundred or more different strike prices and expiration dates. When the underlying stock is very active, market makers may need to update their quotations in dozens of options series simultaneously in response to the fluctuations of the underlying stock price.
The popularity of options trading has increased dramatically over the past few years. As a result, the quote traffic has required ever-increasing bandwidth. In recent years, the quotation rates have become so excessive that the SEC has requested that the options market centers propose quote mitigation strategies to reduce quote traffic. This issue is only being exacerbated further with the roll out of penny pricing in options. While penny increments can tighten the spread, especially in the most actively traded products, the downside is that quotes move around more in a penny environment, due to more pricing levels.
Accordingly, there is a need for a system and method that minimizes the impact of market maker quote traffic on the other components of the system, especially in regard to the ability to display and execute orders and quotes with maximum speed and efficiency.